IRS Letter Ruling 9735008; IRS Letter Ruling 9735020; IRS Letter Ruling 9735019; IRS Letter Ruling 9735026
TO be taxed as an S corporation, a corporation must make a timely election that is consented to by all persons who are shareholders on the day of the election. The election can be made at any time during the tax year before the election year, or it can be made effective retroactively to the first day of the tax year if made on or before the 15th day of the third month of that tax year.
The election is made by having the corporation file Form 2553 containing all the information required by the form with the appropriate IRS service center. (Reg §1.1362-6(a)(2)(i)) Under a law change last year that was retroactively effective for elections made in tax years beginning after '82, IRS may treat a nonexistent election for a tax year as timely if it determines that there was reasonable cause for the failure to file the election on time. (Code Sec. 1362(b)(5)) Recent private letter rulings show that IRS is quite liberal in granting relief. For example, relief was granted in each of the following rulings:
… IRS Letter Ruling 9735008, where a CPA prepared an election for a company that was formed on Oct. 5, '95 and forwarded it to the company's sole shareholder. The CPA told the shareholder to file the election as soon as possible without telling him to file it by Dec. 19, '95. Because he was involved in pressing matters such as purchasing a property and leaving the country for a short trip, the shareholder didn't file it until Jan. 2, '96.
… IRS Letter Ruling 9735019, where a company's co-owner instructed his attorneys to prepare all documents needed to incorporate the company and make an S election and the attorneys prepared the incorporating documents but failed to prepare Form 2553.
… IRS Letter Ruling 9735020, where a company's two shareholders were advised by their attorney and accountant to operate the company as an S corporation but neither the attorney nor the accountant advised them that a Form 2553 had to be filed in order for the company to be an S corporation. The attorney blamed the accountant for not filing the form and vice versa.
… IRS Letter Ruling 9735026, where an accountant sent a completed Form 2553 to the company's president but the form was never filed.
Observation: Until recently, relief could be obtained only by requesting a private letter ruling. However, IRS recently implemented a new procedure that allows companies to obtain relief without incurring a user fee for requesting a private letter ruling. Under the new procedure, a corporation can request relief by writing to the local service center within six months of the due date of the return for the first year the corporation intended to be an S corporation.
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